What’s eating venture debt in India?

Over the decades, legions of Indian businesses, big and small, have grown on the back of debt. But for startups chasing growth at all costs, debt is like a millstone around their necks. Unsurprisingly, in the past nine years, Indian startups have raised about $56 billion in venture capital, but only about Rs 3,300 crore ($481.3 million) in venture debt.

Ecosystem all over the world

Now typically, venture debt lags behind venture capital in startup ecosystems around the world. But the scale of the disparity between equity and debt funding in India is also a sign of a lack of maturity and an over-reliance on venture capital. Venture debt accounts for less than 1% of all startup funding in the country, as against 15% in the US.

And until now, investors have largely seen this asset class as an experiment—but that might be changing, with venture debt slowly gaining credence as a serious investment vehicle. A turning point for the industry, in particular, is the recent interest in venture debt shown by entrepreneurs-turned-millionaire investors Sachin Bansal and Binny Bansal.

The two Flipkart co-founders are looking at options to redeploy their millions after huge exits from the e-commerce company they started in 2007. Binny started his own venture capital fund 021 Capital in January. Sachin, meanwhile, is making equity investments—including a mammoth $100 million in ride-hailing company Ola—besides planning to start his own new venture.

And venture debt has caught both their fancies. Sachin is reportedly in talks to become a limited partner in a venture debt fund. Binny, through 021 Capital, has invested $10 million in one, according to a person aware of his plans, who asked not to be named because the information is not yet public. A situation that is not without a tinge of irony.

Startups across the country

The way the Bansals grew Flipkart created a playbook of sorts for startups in the country. It showed that hyper-growth ambitions are best fuelled through venture capital. And with each round raised and each new investor added, raising money became a bigger measure of a successful company rather than just the brass tacks of a business. The media coverage of rounds raised grew ever more breathless. And peers made an example out of it.

For entrepreneurs who grew a multibillion-dollar valuation business on the back of a steady diet of equity funding, though, dabbling with venture debt is coming a full circle. Sachin declined to participate in this story and Binny did not respond to requests for comment.

That said, startups still remain less than enthused about venture debt.

Raincoats and returns

Of all the different pots of money available for businesses—from private equity and venture capital to money from family and friends to bank loans—venture debt stands out. That’s because it lends like a bank (though at higher interest rates) but assesses risk like venture capitalists.

“VC debt should be seen as an umbrella for a rainy day,” says Vinod Murali, who spent a decade dealing in venture debt before co-founding his own venture debt firm, Alteria Capital, in late 2017. As an “umbrella”, debt financing helps startups extend their runway—how long their venture-funded cash will last. But today, the startups who use the umbrella are the ones who already have a raincoat in the form of equity funding.

That’s because unlike venture capitalists, venture debt funds look for stability more than astronomical returns—they can’t afford to have bets go wrong. For investors, venture debt in India (and globally) is seen as a way to earn higher returns than from fixed-income products—around 13% on average—without the risks of equity investments in startups.

Between 2010 and 2019, startup database tracker Tracxn shows that close to 3,000 companies raised $56 billion in equity funding. At the same time, only 150-odd companies raised Rs 3,300 crore ($481.3 million) in venture debt, according to industry estimates. And those investments came mostly from just three funds—InnoVen Capital, Trifecta Capital, and Alteria Capital, with the last two, only launching post-2015.